CaseStudy:DividendRecapitalizationKKR & Co. L.P. is a private equity and real estate investment firm specializing in direct and fund of fund investments. The company’s asset under management amounts to USD 119,544.3 Mn1 as on 31 December 2015 which grew by 11.6 percent over the previous year which amounted to USD 107,119.3 Mn (as on 31 December 2014). For FY16, KKR ranks 86th among underwriters of U.S. debt and 18th among equity arrangers, according to data provider Dealogic.

When a company incurs a new debt in order to pay a special dividend to private investors or shareholders it is said to have gone ahead with dividend recapitalization. This usually involves a company owned by a private investment firm, which can authorize a dividend recapitalization as an alternative to selling its equity stake in the company. As the capital markets saw a volatile stretch, undertaking dividend recap transactions were looked upon hesitantly which left fewer alternative investment options. Further, dividend recap is infamous amongst investors as it increases the leverage enjoyed by the company without adding value to the company. KKR & Co. LLP invested USD 97.32 Mn directly in Sedgwick Claims Management in Jan 2014. The company's proven performance and long standing status as a high quality credit made it an ideal candidate for a dividend recap. Moody’s has rated Sedgwick as a B3 and says that the company has leverage of 7.0 to 7.5 times. Banks willing to abide the lending guidelines that limit leverage to 6 times were unwilling to underwrite. This brought KKR’ capital arm into the picture who facilitated the deal. Strong investor demand allowed Sedgwick to increase the size of the deal to USD 325 Mn from USD 300 Mn and tighten the original issue discount to 98.75 from 98. The loan was priced at 425bps over Libor. The last deal larger than USD 150 Mn was a USD 190 Mn term loan that was arranged in November 2015 by Stone Point Capital-backed insurance broker Higginbotham. While the balance sheet of Sedgwick weakened but not to the extent that would change its credit rating, KKR reported a better than expected earnings for the second as it benefitted in 3 ways:

1. The firm got a fee for arranging the loan. 2. It holds in Sedgwick which received a dividend payment of USD 375 Mn. 3. A revived market for dividend recaps.

The market remains volatile and investors are still focusing intently on credit, but more dividend recapitalizations could be on the table for companies that can show a good track record of performance, free cash flow and good valuations versus debt, investors said.2

1Mn=million2LPC:KKRbringsbackdividenddealswithUS$325mSedgwickloan,Reuters

FixedIncomeFunds45%

PrivateEquityFunds55%

AssetsUnderManagement